Are We Seeing the Death of the Industrial Conglomerate ?

IT all started in 2015 with UTX, when the conglomerate wanted to divest Sikorsky which they eventually did to Lockheed Martin in late 2015, but United Technologies (UTX) struggled somewhat after that sale, trying to reinvest the sales proceeds and also continue to grow free-cash-flow. Ultimately in late 2018, UTX announced that they will divide the parent  into three separate companies sometime in early 2020.

There has been enough said and written about GE that doesn’t have to be rehashed here, but the mother of all finance companies with a bunch of industrial companies bolted on to it, fell from a $500 billion market cap in 2000 to the $79 billion market cap today, is the face of all that wasn’t good with the industrial conglomerate.

Finally today’s MMM announcement, which was a pretty big miss, makes me wonder if that company will now follow the path of United Technologies (probably too early yet) and eventually rethink the business portfolio.

MMM fell 13% today on 7x average volume.

This monthly chart of MMM shows that if the $185 – $190 area doesn’t hold, it likely means there are deeper fundamental issues.

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Summary / conclusion: It is easy to extrapolate broad industry themes from isolated incidents but GE and UTX are two prime examples of industrial conglomerates that struggled to replicate business segments with sufficient returns on capital when one business was sold or when there was available capital. Or in the case of GE, the company overpaid or got into the wrong business at the wrong time and it pulled down returns over time.

Will MMM break up eventually ? I don’t know enough about it, but when stocks start to lag in bull markets like we are in, Boards get antsy and evaluate business models.

From a bigger picture perspective, America stopped being a predominantly industrial economy and became a service economy sometime during the 1970’s. In other words the service economy was providing a greater percentage of GDP than the industrial economy by the times the 70’s had ended, while the opposite was true from the end of WW II through the 70’s.

The conglomerates held on for a long time. Maybe it’s their time to break up.

Thanks for reading.

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